Monday, May 26, 2014

So I've been spreading foreboding of late, first with IT'S LOOKING LIKE MORE RECESSION IN THE U.S.A. IN 2014 and then with S&P 500 MINI-MANIA HITS. 24% CORRECTION OR 42% CRASH UPCOMING?And now I've had a look at where producers stand with their mixed-use capital and their circulating capital. Specifically, I've looked at commercial and industrial loans gotten from commercial banks and asset-backed commercial paper.Those who understand financing of trade, businessmen tend to use loans to acquire property in capital retained through time subject to known loss. The known loss is known as depreciation and the name given to that kind of capital is fixed capital.Businessmen tend to seek accomodation of property in credit receivables they hold against debtors. Such property put into negotiable instrument form is known as commercial paper. Businessmen use property in deposits, otherwise known as wealth, gained from having their commercial paper discounted by a banker, to pay expenses. In so doing, they transmute wealth into capital.Here's the fixed capital picture.It's hard to get a good idea of what this should look like over long time as the data set goes back only to 1985. That said, it appears that businessmen go through periods where they build up fixed capital to generate sales.Here's the circulating capital picture.And here is what fixed capital and circulating capital look like together.It appears that true asset-backed commercial paper gives a good indicator ahead of what producers plan to do toward fixed capital acquisition.Yet what is most troubling is what I call the Capital Engine ratio. Let's have a look.Think of fixed capital as a car engine and circulating capital as the gasoline. Right now, there is $6.09 of fixed capital loans to $1 circulating capital. Before Q3 2007 peak credit, the Capital Engine ratio averaged $1.34:$1. Since the banking credit collapse and following crisis, the Capital Engine ratio averages to $3.22:$1. The Capital Engine ratio has grown a whopping 459% since peak credit.In short, there isn't fuel, petrol, gasoline to power the engine beyond idling. What has caused this stall state? Why, Ben Bernanke, the former chairman of the Federal Reserve, the supposed expert on the Great Depression, is the man who decided to have an engine with little fuel. Death by billions and billions of cuts is what Bernanke believes is the way to handle a banking crisis and deflation after a massive inflation. Foolishly, while chairman, Bernanke's entire plan had been interest rate suppression. His successor, Janet Yellen agrees with Bernanke's approach.When rates are kept low, capitalists seek return outside of the U.S.A. That further puts strain on bank deposits and thus further weakening bankers already weakened from crisis after inflation. The worst bit of the Greatest Depression engineered foolishly by Ben Bernanke has been to hurt wage earners. Had interest rates risen, wage earners those living on fixed incomes would have gained buying power. Their living standards

Central bankers always should do the opposite of prolonging recession. They should accelerate the collapse. Rates should get put up. Bankers should stepped up acccomodation, discounting every bit of commercial paper presented. That is how keep work flowing.Entrepreneur-adventurers should face the music for their wrong fixed capital structures.The sooner one gets through hard times to the bottom the sooner revival can happen. In fact, law makers should craft law to require by law accelerated recessions.